Well positioned to keep Africa moving

Downstream petroleum company Vivo Energy listed on the London Stock Exchange with much fanfare in 2018 as the largest African IPO on the bourse in more than a decade.

But the stock hasn’t performed, and at R21.59 a share on the JSE, where it is also listed, the valuation is in fact 5.6% lower in the year to date.

Ultimately Vivo Energy’s fortunes ride or die on the growth of the African consumer market, which is a bet most would be happy to take.

Africa is one of the fastestgrowing consumer markets in the world and, according to the Brookings Institution, consumer expenditure in Africa is expected to reach $2.1-trillion by 2025. Vivo is well positioned to service huge swathes of this market.

The company is the secondlargest fuel retailer in Africa (outside SA), where it distributes and markets Shell-and Engen-branded fuels and lubricants to retail and commercial customers.

After acquiring all Engen’s African operations outside of SA last year, Vivo now has a network of more than 2,100 stations across 23 countries, and services more than 800,000 customers a day.

Because the fuel price is regulated in most of the markets where Vivo operates — meaning its margins are limited to a few centres per litre of fuel sold — the business imperative for Vivo is to sell as much fuel as possible (it sells more than 10-billion litres of fuels a year). So a large and growing footprint is key — which is why it opened 100 service stations in the past financial year.

JPMorgan analyst Alexander Mees says the Engen acquisition has driven volume growth, which was up 15% in the third quarter of 2019, and “greatly expanded Vivo’s African footprint and has given it a runway for long-term operational improvement and growth”.

Well-positioned stations are key to attracting more customers, but Vivo has also moved strongly into convenience retailing and quick-service restaurants. It’s rolling out KFC franchises at its sites in Ghana, Ivory Coast, Kenya, Uganda and Rwanda.

Keith McLachlan, fund manager at AlphaWealth, says the development of quick-service restaurants is small but high margin as the incremental costs, synergies from increased footfall and derisking of revenue stream are very attractive.

Vivo’s commercial division contributes about 30% of its earnings and supplies more than 5,000 industrial customers in Africa.

“The retail story is exciting, but the commercial business still dwarfs it in terms of volumes. That said, the commercial business is slightly murkier (intentionally) as individual clients, contracts and margins are hard to unpack or forecast,” says McLachlan. “The risks here are contractual and forward order books while the opportunities are to scale this business up, leverage across the group’s existing infrastructure and even diversify into parallel industries, client bases and geographies.”

Though Vivo is positioned for growth, it is exposed to a wide range of very risky geographies, currencies and regulatory pressures.

One such risk is Morocco. Last year, a consumer boycott of fuel brands there and a subsequent call to limit the profit margins of fuel distribution companies squeezed Vivo’s margins. Its Moroccan subsidiary said last month that it was being investigated by the local competition council.

McLachlan says Vivo is a good business, “but there is a lot of risk in doing multicountry, multicurrency and highly regulated business with large fixed costs throughout Africa. That said, if anyone can do it, [Vivo] and Shoprite are front of mind.” ●